The 333 office sales that closed in 2018 across the seven California office markets we analyzed totaled $20.3 billion, which was 20% below the 2017 office investment total. The Bay Area and Orange County office markets saw the most consistency in office investment across all metrics we observed, compared to the previous year. All major California office markets saw a year-over-year decrease in office investment in 2018, except the Bay Area, where sales went up 2% compared to 2017. Last year, the Bay Area overtook Los Angeles, with $1.8 billion more in sales and 1.3 million square feet more office space changing hands.

The Orange County office market had a rather steady performance over the past two years. Office sales saw a modest 4% drop year-over-year, the average price per square foot dipped 2%, and only 8% less inventory changed ownership during 2018, compared to the year before. While the Los Angeles office market enjoyed a pretty good 2017, sales dropped 40% in 2018, and the 15 million square feet of L.A. office inventory that sold last year was 36% less than the amount of space traded the year before. Prices, however, dipped only 6%, averaging $334 per square foot in 2018.

Average office prices in San Francisco maintained an upward trend in 2018. Although a Q3 spike in price per square foot brought the Bay Area close to San Francisco levels, the latter remains California’s priciest office market. In terms of sales volume, the San Francisco market remained in third place, despite a 23% year-over-year drop in dollar volume. San Diego office investment in 2018 rested below a $2 billion total, which placed the office market fifth in sales for the year. The average price, however, increased 16% year-over-year, making San Diego 2018’s third-priciest California office market, one spot up from the previous year.

Office space in Sacramento also saw a boost in 2018, as the average price per square foot increased 26% year-over-year. Sacramento office sales dipped 13% compared to 2017, totaling just under $744 million. Out of the three California office markets to record a decrease in prices last year, Inland Empire office space saw the steepest drop and was on average 24% cheaper in 2018 than in 2017. Office sales dropped 43% year-over-year, and only 1.8 million square feet of inventory moved on the Inland Empire office market in 2018, which was 32% less than in 2017.

Check out the numbers in the interactive chart below, and read on for the top office deals of the year, as well as more details on how each California office market fared in 2018.

Google closed the California deal of the year – and the third-largest 2018 office sale nationwide – in November, when it paid an even billion dollars for the 12-building Britannia Shoreline Technology Park in Mountain View. Irvine-based HCP had already been leasing the park to Google as principal tenant for several years. This acquisition further consolidates the tech company’s growing core campus area, as the site is located just a few blocks away from the Googleplex, and right across the street from a visionary headquarters project that the company recently proposed. Designed by Thomas Heatherwick and Bjarke Ingels, the North Bayshore campus breaks with tradition and envisions the future of the work environment as a transformable series of vast greenhouses that can be reassembled according to future styles and employee needs.

Among last year’s top 20 California office deals is also HCP’s sale of Britannia East Ground campus in South San Francisco, to long-term tenant Genentech. The biotech company has occupied the property since 2006 and first exercised its right to buy in November 2016, when it purchased two parking structures and two office buildings. In July 2018, Genentech paid $269 million for another four buildings it was already leasing on campus.

Boston Properties and the Canada Pension Plan Investment Board completed the joint acquisition of the 21-building Santa Monica Business Park. This $628 million purchase was California’s second-biggest of the year. According to statements made at the time of sale, the 47-acre property located in the Ocean Park neighborhood of Santa Monica encompasses roughly 1.2 million net rentable square feet, of which about 70% is subject to a ground lease with 80 years remaining. The BP – CPPIB partnership has the right to purchase the land in 2028, with subsequent purchase rights every 15 years. Santa Monica Business Park had previously been acquired by Blackstone in 2009, as part of its $39 billion buyout of Equity Office Properties. The property was 94% leased at the time, with tenants including Snap Inc., Activision Blizzard, and Pandora.

In November, Blackstone put $250 million on the commercial component of Embarcadero Square. Formerly known as Golden Gate Commons, the mixed-use complex covers three city blocks and encompasses roughly 270,000 square feet of Class A San Francisco Financial District office space. The three-building portfolio was sold by Hong Kong private equity firm Gaw Capital at 90% occupancy.

In the third-biggest California office sale to close in 2018, Hines unloaded a four-building West Side L.A. office portfolio. Campus at Playa Vista sold to Chicago-based Heitman for close to $321 million, at nearly full occupancy. SEC filings for the transactions indicated that the three major leases at the property – Belkin electronics, USC Institute for Creative Technology, and non-profit corporation ICANN – will be coming up for renewal in over the next three years. According to The Real Deal, this 324,000 square feet of Class A office space in Playa Vista was part of nearly 2 million square feet that Hines Global put on the market last year.

Hines was also an active buyer, with two purchases ranking among the top 20 California office deals of last year. In April, the company paid $217 million for the 22-acre, 375,000-square-foot Clearview Business Park in San Mateo, a property that is 100% leased to GoPro and Tesla. Deutsche Asset & Wealth Management was the seller. In October, a partnership between Hines and Oaktree Capital Management closed on Ygnacio Center, a three-building office complex located in Walnut Creek. LaSalle Investment Management sold the East Bay Area value-add office property for close to $211 million, after less than two years of ownership—the firm previously acquired Ygnacio Center in 2016 for $158 million. Hines and Oaktree plan to reposition the property by adding a brand-new 8,200-square-foot amenity center with conference facilities, co-working space, and other tenant improvements.

Check out the full list of top 20 California office sales of 2018 below and read on for the full picture of 2018 office investment in each market:

Steady Growth Places Bay Area at #1 in 2018

The Bay Area office market checked “best performing” for almost all the boxes. Although it did not overtake San Francisco for average price per square foot, the Bay Area saw the highest year-over-year increase in prices, the most deals closed, the highest dollar volume, and the most inventory changing ownership.

87 office properties larger than 50,000 square feet sold on the Bay Area office market last year, for a total of nearly $7 billion. This marked a 2% year-over-year increase in office sales and placed the Bay Area above the other six major markets we analyzed. Though this was only a modest inch upward, it’s worth noting that the Bay Area was the only major California office market to see an increase in sales in 2018 compared to the previous year.

Office prices in the Bay Area saw the sharpest increase, rising 28% in 2018 over 2017 and resting at an average of $419 per square foot. The 16 million square feet of Bay Area office space that changed hands last year accounted for 29% of the total inventory traded across the seven California markets we cover in this report.

Los Angeles Office Sales Drop 40%, Market on Cooldown Throughout 2018

Investment activity on the L.A. office market cooled significantly during 2018. The 85 office deals that closed over the course of the year totaled nearly $5 billion, which was 40% less than the dollar volume recorded in 2017. Sales data plotted a notably flat trend, with volume averaging roughly $1.2 billion per quarter and market stability persisting throughout the year.

Office space in Los Angeles got slightly cheaper in 2018, as average prices dropped a modest 6% year-over-year and rested at $334. Nearly 15 million square feet of office space traded on the Los Angeles market last year, marking a 37% drop in amount of inventory traded, compared to the 23 million square feet of office space sold in Los Angeles in 2017.

The biggest sale of the year closed in July and accounted for 49% of Q3 2018 Los Angeles office sales. Boston Properties and the Canada Pension Plan Investment Board paid close to $628 million for the ground lease on Blackstone’s 47-acre, 21-building Santa Monica Business Park.

The year kicked off with a record-low Q1 for the San Francisco office market. Although activity picked up somewhat during the second and third quarters, Q4 marked another downturn, and the market wrapped up 2018 with a dollar volume of just under $3 billion and a half, which was 23% lower than the 2017 tally.

Prices also resumed their steady climb after the Q1 2018 plunge and rested at an average of $608 per square foot, marking a 5% year-over-year increase. A modest recovery, but more than enough for the market to remain California’s priciest. Close to 6 million square feet of office space changed ownership in 2018—roughly 24% less inventory than in 2017.

In the market’s largest deal of the year, local investor DivcoWest partnered with CalSTRS on the acquisition of the 32-story tower at 301 Mission Street. The Yerba Buena office building was sold by Vanbarton Group and commanded $293 million, which came out to roughly $923 per square foot.

Orange County Records Least Market Fluctuation in 2018

Orange County was the California office market that experienced the least fluctuation from one year to the next. The number of deals closed in 2018 was on par with the previous year. Total dollar volume amassed in the 43 transactions to close last year was $2.1 billion, which was only 4% lower than 2017 sales. Once again, Q3 was the market’s strongest quarter, when nearly 3 million square feet changed hands, for a total of $908 million, which accounted for 42% of the year’s dollar volume.

Average prices in the Orange County office market have been holding above $200 per square foot for over two years and continue to slowly inch upwards, despite the occasional setback. In 2018, prices rested at an average of $257 per square foot, marking a 2% dip compared to the previous year. Transactions closed last year encompassed 7.5 million square feet, roughly 8% less than inventory traded during 2017.

In the largest O.C. office deal of the year, the Rockpoint Group paid $157 million for the five-building Summit Office Campus phase one and phase two in Aliso Viejo. The value-add property was 79% occupied at the time of sale, with tenants including Microsoft, NuVasive, and Pacific World Corp.

San Diego Average Price per Sq. Ft. Up 16% Y-o-Y

Although investment activity last year followed a steadier upward trend than in 2017, office sales in the San Diego market fell below $2 billion in 2018. The 35 deals to close last year totaled $1.8 billion, marking a 12% drop in dollar volume compared to 2017 sales. Office inventory traded in 2018 totaled 5.3 million square feet, which was 25% less than the year before.

On the other hand, the average price per square foot has been holding above the $300 mark and steadily rising for six consecutive quarters. In 2018, prices rested at an average of $337 per square foot, which marked a 16% year-over-year increase.

The biggest office deal to close in San Diego last year was the sale of the Sorrento Towers. Shorenstein bought the four-building complex, last renovated in 2014, for $186 million. PGIM Real Estate had previously acquired Sorrento Towers North and Sorrento Towers South in 2013, as part of a seven-property portfolio sold by Blackstone and valued at $405 million.

Sacramento Office Sales Drop 13% from Previous Year

Office investment in the state capital cooled somewhat during 2018. Having kicked off the year with a strong Q1, Sacramento office sales slowed gradually by Q4, and the market wrapped up the year with a total of $744 million, which was 13% less than the dollar volume amassed in sales closed during 2017.

Prices, however, increased 26% year-over-year, despite significant fluctuations from quarter to quarter. Office space in Sacramento was priced at an average $197 per square foot in 2018.

In January, Shorenstein paid $161 million for the U.S. Bank Tower in Downtown Sacramento. The LEED Silver-certified, 24-story building was completed in 2008, encompasses 366,337 square feet of class A office space and is among the most distinctive of the city skyline. No other office sale closed on the Sacramento market in 2018 topped this acquisition.

Inland Empire Sees Slow 2018, Sales Drop 43% Y-o-Y

The Inland Empire fared comparably worse than the larger six California markets we analyzed. Considering that commercial real estate in Inland Empire is mostly industrial, wide year-over-year swings in the office sector are not uncommon and can be caused by as little as one office sale, or in this case, a very strong Q2 in the previous year. Though more deals closed in 2018 than in 2017, transactions encompassed 32% office inventory. Dollar volume amassed by office sales in 2018 totaled $364 million, a 43% drop year-over-year.

Average prices continued to yo-yo and even stayed close to the $200 mark for three consecutive quarters, but finally rested at roughly $185 per square foot, which was 24% below the 2017 average.

Notable deals to close on the Inland Empire office market last year include two Ontario office properties that each commanded $30 million. In June, PGIM Real Estate sold the 123,035-square-foot Class A mid-rise One Piemonte to Greenlaw Partners. In July, MGR Real Estate acquired Empire Towers V from TA Realty, thus completing its Empire set—the company had previously purchased Empire Towers I-IV from Guggenheim Investments in Q1 2017.

Tech Tenants and Green Building Shape California’s Largest Office Developments in 2018

San Francisco stands out as home to most of the largest office projects to be completed in California last year. The 1.4 million-square-foot Salesforce tower became the tallest skyscraper in the San Francisco skyline in Q2 2018. 181 Fremont was also completed last spring and broke several records before the end of the year: the first penthouse to sell in the mixed-use Jay Paul development got the highest condo price per square foot in the city’s history, and Facebook signed $35 million lease for 436,000 square feet in the office portion of the tower, reportedly the largest San Francisco lease in three years, at the time.

The second-largest office project to come online in California last year was Central & Wolfe, which is just a nickname for Apple Campus 3. Located in Sunnyvale, the futuristic tech office campus was designed by HOK architects to be net-zero energy ready and is LEED Platinum-certified.

Facebook also expanded its Menlo Park home with the completion of the Frank Gehry-designed MPK21 building. Designed to reduce impact on the environment and enhance employee well-being, the project took less than 18 months to build and is LEED Gold-certified. In the fall, Google finally moved into the massive Spruce Goose Hangar redevelopment in Playa Vista, one of the most iconic adaptive reuse projects in the country.

See the full list of California’s 10 largest office completions of 2018, below:

Methodology

For this report, we relied on Yardi Matrix data to analyze all office transactions to close in the Bay Area, Inland Empire, Los Angeles, Orange County, Sacramento, San Diego, and San Francisco office markets. We selected only transactions with price tags equal to or larger than $5 million each. Our research, based on sales data recorded from January 1st, 2017 up until February 19th, 2019, includes completed office buildings that are equal to or larger than 50,000 square feet. Regarding mixed-use assets, only properties including over 50% office space were considered.

We counted portfolio deals as single transactions and only analyzed portfolio sales of buildings that were part of the same campus or property, and that shared the same transaction terms. Distressed sales were excluded altogether. To ensure that the trends and comparisons presented in our report are valid, we also excluded ‘ownership stake,’ ‘ground lease,’ ‘controlling interest,’ ‘portfolio’ and ‘undisclosed’ deals from our calculation of the average price per square foot. We did, however, include them in our calculations of sales volume and total square footage traded.

Although we have made every effort to ensure the accuracy, timeliness and completeness of the information included in this report, the data is provided “as is” and neither COMMERCIALCafé nor Yardi Matrix can guarantee that the information provided herein is exhaustive.

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